Q3 2025 ZSpace Inc Earnings Call
Speaker #1: Following their remarks, we'll open the call for analyst questions. Before we go further, I would like to turn the call over to Mr. Robles as he reads the company's safe harbor statement.
Speaker #1: Greg, please go
Speaker #1: ahead. Thanks, operator.
Speaker #2: Good afternoon, and thank you for joining our conference call to discuss our third quarter 2025 financial results. Before we begin, I'd like to remind everyone that certain statements made on this call may be considered forward-looking statements.
Speaker #2: These statements are based on our current expectations and beliefs and are subject to risks and uncertainties that could cause actual results to differ materially.
Speaker #2: Additionally, we may discuss certain key business metrics, which are non-GAAP financial measures. A description of these non-GAAP measures and any comparisons to the most directly comparable GAAP measures can be found in our earnings release on the Investor Relations section of our website.
Speaker #2: Now, I would like to turn the call over to the CEO of zSpace, Paul Kellenberger. Paul?
Speaker #3: Thank you, and good afternoon, everyone. Thank you for joining us for our third quarter earnings call. I am Paul Kellenberger, CEO of zSpace, and with me is Erick DeOliveira, our Chief Financial Officer.
Speaker #3: We're excited to share zSpace's Q3 performance and the progress we've made advancing our strategic priorities. Our third quarter results reflect our focus on advancing our strategy and controlling what we can control.
Speaker #3: During the revenue comprised over quarter, our software and services 50% of total revenue, contributing to gross margin expansion of over 640 basis customer renewals and the points.
Speaker #3: grew revenue 18% execution and discipline focus on delivering value to our sequentially, which is a testament to our strategy. customers despite ongoing In addition, we macroeconomic and funding uncertainties.
Speaker #3: meaningful internal progress across our products and innovation. As announced launch and delivery of our Career Exploration application. We're This performance was driven by strong 2nd Avenue Learning, leading to the We've made pleased with our team's dedication to excellence and their ability to last quarter, we completed the integration of education products with speed and impact.
Speaker #3: In deliver innovative AI-powered addition, to support our global expansion and ensure accessibility across various educational geographies, we're strategically leveraging artificial intelligence to eliminate language barriers.
Speaker #3: AI is enabling website content and application interfaces and providing tools that can understand and interact in over 50 languages. This initiative not only expands our global platform, including reach, but ensures students and educators regardless of their native language can fully utilize quick and efficient translation across our zSpace's award-winning educational experiences significantly broadening our global reach.
Speaker #3: Building on this, we began deploying our solutions with GEMS Education at Innovation in Dubai. This partnership represents their flagship school of research and a regional first in AR/VR learning integration across K-12 education in the UAE and allows students to explore complex STEM concepts through interactive three-dimensional simulations.
Speaker #3: Beyond Dubai, we've secured deployments in Italy, Bulgaria, across the Middle East, continuing to build momentum in international markets. While funding uncertainty persists in Poland, and additional locations the US, we've also achieved meaningful customer wins.
Speaker #3: Union Interactive, a key partner in Bulgaria, expanded its use of zSpace as part of the national STEM project for K-12, which was funded by the European Union.
Speaker #3: In Florida, Dixie investment in robotics and health County Schools made a significant applications for high school students. Which was funded by the Workforce Development Incentive Grant.
Speaker #3: Lastly, in Alabama, the challenger learning center deployed zSpace to enhance elementary STEM education to foster STEAM and STEM interest and learning. In closing, we remain confident in the long-term growth potential of zSpace and our ability to deliver on our vision.
Speaker #3: That said, we approach the fourth quarter with cautious optimism, given the ongoing uncertainty related to tariff impacts and the education funding environment in the U.S.
Speaker #3: Importantly, this caution is not a reflection of customer demand. Recent wins and ongoing engagement demonstrate that both existing customers and prospects continue to express interest in our solutions and a desire to expand usage.
Speaker #3: We believe that as federal education policy continues to take shape, and funding mechanisms become more predictable, the longer-term outlook for our business will strengthen.
Speaker #3: With that, I will turn the call over to Erick to walk through our financial results in more detail.
Speaker #3: Erick?
Speaker #4: Thank you,
Speaker #4: Paul. As you consider our results, a reminder that our revenues are substantially recognized upon shipment of laptop units, or fulfillment of software license keys.
Speaker #4: This includes recognizing licenses in the period in which the full value of multi-year software they are fulfilled. Only a small portion of our revenue is rapidly recognized.
Speaker #4: As a result of this revenue recognition treatment, our financial results can exhibit quarter-to-quarter and year-over-year variability that exaggerates the underlying seasonality of the business.
Speaker #4: Throughout this year, we have seen the dual themes of internal execution success, driving product innovation, quality of revenues, and spent management, opposed by external headwinds from tariff policy and uncertainty around education funding.
Speaker #4: Both themes continue to be in evidence as we review financial performance through the period ending September 30th. And now, diving into our year-to-date performance.
Speaker #4: Year-to-date revenues were $23 million down 22% year-over-year. As noted in our Q1 and Q2 results, we have been enjoying outperformance in software and services revenues, which make up 48% of the revenue portfolio, versus 42% for the first nine months last year.
Speaker #4: Or up 6 percentage points. This dynamic continues to be an important driver of gross margin expansion. As previously discussed, our P&L reflects multi-year software license revenue in period.
Speaker #4: To help better characterize the runway health of the business, we offer two non-GAAP software operating metrics. As of September 30th, 2025, the annualized contract value of renewable software was $10.2 million.
Speaker #4: Down 10% compared with 12 months ago. Also, as of September 30, 2025, the net dollar revenue retention of customers with at least $50,000 of ACV was 77%.
Speaker #4: For those customers present as of September 30th, 2024. Unfavorable performance on these two metrics is attributable to two large customers who collectively expanded their zSpace footprint a year ago but who were not able to fully renew their expanded commitment at this time, due to macro factors.
Speaker #4: Normalizing for these two customers ACV would have been flat year-over-year and NDRR would have been 94%, pointing to stability across the broader customer base.
Speaker #4: Bookings for the nine-month period ending September 30th were $22.7 million, down 35% year-over-year versus the comparable prior year period. Gross profit was $10.9 million.
Speaker #4: Down 10% against the same period last year. This includes a one-time charge in the second quarter for discontinued software license inventory, which is at once related to our exit of China and also our continued efforts to bring previously resold third-party titles in-house.
Speaker #4: Through both acquisition of applications and internal development. Gross profit was also affected by a applicable tariffs and duties; although we have largely treated these as pass-through and a dollar basis, we incur some margin compression from doing so.
Speaker #4: Gross margins for the nine-month period were $47.3%, up 6.4 percentage points versus the prior year period. Improvements in profitability continue to be driven by the same three factors identified earlier in the year.
Speaker #4: A favorable mix of hardware versus software and services revenues contributed 2.4 percentage points to the margin expansion over the year-to-date period. Rate-based factors included new hardware products with better price and performance profiles, as well as an increased amount of zSpace-owned software content.
Speaker #4: These rate-based factors delivered an additional 4 percentage points of margin expansion over the year-to-date period. Operating expenses excluding stock-based compensation were up 9% for the first nine months of the year.
Speaker #4: People-related costs, which make up most of our operating expenses, were up 3% year-on-year for the same comparable period. Again, excluding stock-based compensation. And now for the third quarter.
Speaker #4: Q3 revenues of $8.8 million were down 38% year-on-year, against a prior year quarter which included an unusually large customer order that did not fully repeat this year.
Speaker #4: Notably, this represents an 18% sequential improvement over Q2. As previously mentioned, strength in high-margin revenues continued into the third quarter, with software and services representing 57% of total revenues.
Speaker #4: And 11 percentage point mix shift with significant gross margin implications. Previously discussed turbulence in the US K12 market has persisted, resulting in unpredictable purchasing patterns and delays in school districts across the country.
Speaker #4: Bookings for the three-month period ending September 30th were $7.4 million. Down 37% year-over-year. CTE customers drove 49% of bookings value, up from 41% in the prior year comparable period.
Speaker #4: Gross profit was $4.5 million and gross margins were $51.2%, up 6.4 percentage points versus Q3 last year. This lapse the 6 percentage point margin expansion in that quarter and continues the improvements in profitability we have been delivering for five consecutive quarters now.
Speaker #4: Within the quarter, the 11 percentage point mix shift in revenues was responsible for $4.3 percentage points of margin gain. And the rate-based factors drove $2.1 percentage points of improvement.
Speaker #4: Normalizing for a 0.1 million dollar adverse impact of tariffs Q3 margins would have been $52.3%. Operating expenses of $6.6 million for the quarter excluding stock-based compensation were up 4% year-over-year.
Speaker #4: People-related costs, excluding stock-based compensation—which make up the bulk of costs—were up 5% year-over-year against the comparable prior year quarter. Our reported results include $2.7 million in stock-based compensation expense, attributable to grants made as part of our employee equity incentive program.
Speaker #4: Relative to the 22.8 million shares issued at outstanding at the start of the year, we continue to manage the issuance of RSUs as part of the employee equity incentive program to a target burn rate of less than 7% for the full year.
Speaker #4: Turning to the balance sheet, as of September 30, 2025, zSpace had approximately $4.3 million in cash, cash equivalents, and restricted cash, compared to approximately $3.0 million in cash, cash equivalents, and restricted cash as of September 30, 2024.
Speaker #4: Our path to profitability continues to run through revenue growth via operating leverage, through our ongoing expansion of gross margins and tight stewardship of operating expenses.
Speaker #4: While overall revenues are challenged by the headwinds in the US K12 market, our success in deriving more of the revenue portfolio from software is bearing fruit.
Speaker #4: The gross margin expansions from revenue mix shift into software from additional first-party software and from new hardware product releases are now part of our track record in delivering results.
Speaker #4: Additional and yet unannounced hardware innovations will further improve on this performance. Cautious and measured OPEX investments have also been a tool for driving performance and innovation while staying on the path to profitability.
Speaker #4: As a result, our adjusted EBITDA losses have narrowed to below $2 million for the third quarter. In sharp sequential contrast to earlier quarters this year.
Speaker #4: Now moving on to our outlook for the final quarter of the year. 2025 is concluding with familiar obstacles still before us. And the challenges of the government shutdown over the first six weeks of the quarter.
Speaker #4: Clearly, many of our customers continue to value the contributions which zSpace makes in their classrooms and training environments as demonstrated by the proportion software and services revenues make up in our Q3 results.
Speaker #4: However, the overall outlook remains difficult to project at this time. As demonstrated throughout the year, we remain confident in our ability to improve the quality of both hardware and software revenues and move the company forward to profitability.
Speaker #4: But we cannot credibly project business volume under current circumstances in the U.S. education sector. Given this, we will continue to refrain from issuing formal financial guidance.
Speaker #4: Now I will turn the time back to the operator for
Speaker #4: Q&A. Thank you.
Speaker #2: Ladies and gentlemen, to ask a question at this time, you will need to press star 11 on your telephone and wait for your name to be announced.
Speaker #2: So we draw your question simply press star 11 again. Please stand by while we compile the Q&A roster. Our first question coming from the lineup, Alex Paris with Barrington Research, your line is now open.
Speaker #3: Thank you. And thank you for taking the time to answer my questions. Nice job on revenue in the quarter. Better than our expectations. Better than the consensus.
Speaker #3: In this still uncertain environment. Diving into the uncertainty of the environment. And you mentioned that I want to talk a little bit about the funding environment.
Speaker #3: But before I talk about that, you referenced the government shutdown for six weeks of the quarter. How does that impact zSpace directly? Or is it just another point of uncertainty influencing decision-making?
Speaker #1: Erick, you want to take that one?
Speaker #4: Yeah, I can take that and Paul, you can add in. Thanks for the question, Alex. I think the way to think about the shutdown is it, in many ways, feels like the kind of headwind we felt throughout the year where our end users have obstacles to overcome in making purchasing and funding decisions.
Speaker #4: And additional challenges in accessing those funds. Through the first six weeks of this quarter, their biggest obstacle has been just an inability to access funds that would have cascaded down from various federal departments, whether it's the Department of Labor or Education.
Speaker #4: And that imposes a delay in many cases in accepting shipments of products, as well as upfront determination to conclude purchase orders with us. So, in many ways, it feels like more of the same from the first half of the year.
Speaker #4: In other ways, it's a slightly different wrinkle that doesn't necessarily influence their decision-making, but the timing of their
Speaker #4: decisions. Yeah, that's what I was
Speaker #3: thinking. Because if what buckets of federal money do schools access to purchase your product? Given that most, the vast majority of K through 12 funding is state and local derived.
Speaker #3: But things like Title I and so on, come through the federal government. But it's my understanding that that money continued to flow.
Speaker #1: If I can, Paul, do you want to take that from the perspective of the person?
Speaker #4: Yeah.
Speaker #4: Yeah. Okay. Yeah.
Speaker #1: Let me take that one. As you well know, and two different pieces to the business, Alex, the CT business, which a lot of the funding is Perkins.
Speaker #1: And that is flown. I think the speed at which the funding has flown has differed depending on which color the stage is. And I can make that comment.
Speaker #1: But that funding on the CT side is flowing. On the K12 STEM side of it, 10% of the funding is from the DOE, which is federal.
Speaker #1: And there are a number of different Title programs that we participate in. Some of them are even things like Title I. But as you noted, the vast majority of the funding is state and local.
Speaker #1: And I just think it's the overall macro environment. And to give you a little bit of a little more detail, I was at a conference about three weeks ago.
Speaker #1: With a group of superintendents, I won't name any of them, but there was about 60 of them. And I probably spoke to about 15 of them.
Speaker #1: They were all, I'll say, believing things have kind of gone back to the way they were previously with significant nuance that federal funding is now flowing directly to the states unencumbered.
Speaker #1: And when I say "unencumbered," if you recall, as part of the administration's revisions in education, the funding is no longer tied to specific Title Acts.
Speaker #1: And again, Title I and some of the other titles have a lot of things like special education learning. English learning programs. Supplemental type things.
Speaker #1: They no longer have those connections. So I think the term we're using continuing to use is cautiously optimistic. We actually in the big scheme of things, and thank you for your comments on our results, we're again, we're just cautiously optimistic.
Speaker #1: And that's probably the best way to leave it.
Speaker #3: Okay. That works. I appreciate that color. In talking about your recent wins, Paul, both in the press release and your prepared comments, I don't know that you mentioned Danbury.
Speaker #3: The Danbury School District press release looked quite interesting. It's the largest school district in the state of Connecticut and the seventh largest overall.
Speaker #3: What is the deployment there? Is it one high school in three middle schools? Or is it going to be ultimately more than that?
Speaker #4: Ultimately, we are right now, I'll say it's the beginning. There's still more opportunity. We're hoping it district. goes entirely across the And I think it's got a lot even more opportunity that goes beyond it.
Speaker #4: We announced it pretty recently. It's been deployed. We know they're and as evidenced by our continued focus on the software side of the business and the renewals.
Speaker #4: We know they're quite happy with it, which we hope to keep them there. It is they are using Career Explorer. Which, as we've discussed previously, the acquisition of Second Avenue Learning has been instrumental in us helping move that one forward.
Speaker #4: But it is right now really focused on the middle and high schools. I think there are approximately 12,000 students in the district.
Speaker #4: The other one that I will mention that you didn't ask about it, but it was in I happened to be in the Middle East as we speak.
Speaker #4: And met with Jim's education this week. Jim's education is the largest private school network in the world. And they put in a zSpace classroom lab into a brand new facility.
Speaker #4: I was meeting with the senior leaders this week. And we're working hard. Nothing is concluded. On really making this broader within Jim's. And when I say broader, across the entire UAE, Saudi, markets within the Middle East.
Speaker #4: They're also in the UK. They're also in India with schools. So that one is very much at the
Speaker #4: beginning. That sounds
Speaker #3: Exciting. But essentially, you put it in this classroom lab, do a great job. They use it. And in time, there are opportunities to roll out to other schools.
Speaker #3: That's the idea,
Speaker #3: right? Correct.
Speaker #4: And also, the opportunity to roll out additional software applications within the existing in Danbury's case, there's other applications that we would like them. And quite frankly, more devices as well to make it even broader.
Speaker #3: Okay. And then, well, I'm kind of on the same topic. You talked about Eric talked about the net dollar revenue retention, 77%. And said that that is due it looks like in large part to two large customers who collectively expanded their footprint last year but could not renew at the same rate, maybe just a little bit more color
Speaker #4: Yeah, I'll take that one, Paul. That's correct. Alex, and in particular, what stands out as encouraging for us is that this was one where the largest of the two had a deployment of several hundred, not quite 1,000 units across six schools in their district.
Speaker #4: Faced with the same budgetary constraints that many schools—many of our K-12 customers—are dealing with, they made a decision not to fully renew.
Speaker #4: They've gone from being a seven-figure software renewal account to being a mid-six-figure account. And just taken by itself, if you were to normalize for that one customer, both of those metrics would have been essentially flat year on year.
Speaker #4: Now, by way of color, what's encouraging is how they made the decision to shoehorn themselves into their next year budget. They didn't go dark on all of the devices.
Speaker #4: So they had, I think, about 700 devices, 800 devices across the school district in six schools or so. And they have preserved all of those.
Speaker #4: So they thinned out some of the software titles on those devices, but they've kept a presence on all of these seven, eight hundred student desks that feature zSpace.
Speaker #4: So, to put it in other terms, we're still farming the same acreage. There are fewer crops growing there, but it's the same footprint that they have preserved going into their next year of experience with zSpace.
Speaker #3: And Alex. So the idea there would be you hopefully, when the budget constraints are not so prevalent, maybe they'll take additional software titles onto that farm.
Speaker #4: No. Exactly. As Paul said, cautiously optimistic. By the way, if I can add a little more color, Alex, and this is our log in the public domain.
Speaker #4: So I'm not saying anything that's confidential here. But there have been massive changes at the superintendent level in St. Louis over the course of the last year and a half.
Speaker #4: And I'll just call it upheaval. They've been through two superintendents. And a lot of I'll just say disruption at the board level. Between that and the funding challenges and having to make some decisions about closing schools, that's it's been a really difficult situation when you look at it from the school district side of things.
Speaker #4: But as Eric said, we're happy they're with us and they continue to use the product. And we have an upsell opportunity down the road here.
Speaker #3: Great. And then let me just ask one last quick one, and I'll pass it along. I appreciate the fact that you can't credibly project volumes here at this point.
Speaker #3: But seasonally, there tends to be an increase in revenues from Q3 to Q4. Do you think that that pattern will persist this year without getting into the numbers or the magnitude?
Speaker #3: Or is there a risk that it could be lower
Speaker #3: sequentially? I'll take that one, Paul.
Speaker #4: I think that this is really where the government shutdown looms as a huge wild card. And because our revenue recognition is tied to actual shipment and fulfillment of product, and very little of our revenue is recognized immediately, it is, at least as of today, an unanswerable question.
Speaker #4: You're correct that typically we see a sequential increase in revenues into Q4, or at least relatively strong revenues that come from fulfillment of orders that came in late in Q3.
Speaker #4: The government shutdown just means that the timing of those shipments continues to be up in the air.
Speaker #3: Okay. Great. Thank you. I appreciate that. I'll get back on the
Speaker #3: Q. Thank
Speaker #5: you. Our next question coming from the line of Rohit Kulkarni with Broad Capital Partners. Your line is now
Speaker #5: open. This is
Speaker #6: Jared Osteen on for Rohit. Thanks for taking the questions. And going a little bit deeper into the several recent developments within the workforce and CTE segment, could you walk us through some of the ones you're most excited about and generally how CTE traction has been trending?
Speaker #6: Thanks.
Speaker #4: Let me take that one, Eric, to start. And if you want to add in numbers, by all means, do so. Jared, as I was saying earlier, the vibe in the CTE segment and a lot of the CTE market, again, the way that we go to market, there's really two segments.
Speaker #4: One is the K12 CTE market, and the other one is in the community colleges and other type groups and workforce development. The K12 CTE business right now, and there are a number of deals that we have, that we're pending I'll say funding confirmations.
Speaker #4: And I think what's changed in the business—by the way, again, the CTE funding is the one that's supported by bipartisan support. We feel good about that side of the business.
Speaker #4: On the K12 CTE side of it, that side also I'd say has been somewhat slowed down than the normal pace, mostly because CTE directors still report to a superintendent, and the superintendent is the one leading the K12 district.
Speaker #4: But again, we feel bullish on it. So it might have slowed down a little bit. The biggest piece that continues to resonate with our customers, and we've been talking to many of them, is this Career Explorer application that we announced.
Speaker #4: I know we discussed it, and we've been shipping, and it's in the market now. And it is really the launch point for us for careers.
Speaker #4: And it could be careers in skilled trades. And as we previously have released and announced, we've got we're using AI, and we're working with OpenAI, and using AI within career explorer are plan is, and again, this isn't a public domain, to release all of our applications and embed AI into the applications.
Speaker #4: And that's something that we're working on now. So I think the career explorer piece within CTE is extremely well-received. There's the largest annual conference coming up in December, ACTE.
Speaker #4: And I think come the next quarter, we'll even have some more detailed answers to your questions once we get through that. Eric, I don't know whether you want to talk about any other numbers.
Speaker #4: I know we talked about the CTE business quarter to quarter. Since you brought up Career Explorer, I think the one thing that I'd note there that is encouraging is you'll recall back in Q2, we announced that at the very beginning of Q2, we closed on an acquisition for Second Avenue Learning. I would indicate that part of the purpose of that team was to drive roadmap acceleration and bring new products forward soonest.
Speaker #4: Our career exploration product was delivered by that team and put into the market in Q3. So very rapid go-to-market from the conception of that idea to actually fielding it through our sales team. The bookings, I believe, or bookings, we've actually delivered low six figures in value for that product alone.
Speaker #4: I think that part of that is encouraging, just internally from us, that we got a product to market that quickly. But I think also it highlights how well positioned that is, that the CTE market is hungry for the kinds of tools that will not only accelerate students through training to the qualifications they're seeking, but also the kinds of institutions that are looking to help guide students into the right programs that are most suitable for them.
Speaker #4: So part of that is us being very pleased of having done a good job at bringing that product to market. The fact that we're finding a very receptive market and that we've actually concluded sales within six months of closing on Second Avenue, I think highlights that we're well positioned for growth in that segment going forward.
Speaker #6: By the way, Jared, one other detail that is really tactical, but you probably noticed within the last six weeks or so, is that we announced a broadening of our suite in the robotics applications area.
Speaker #6: Next week, we'll drop another press release on another important area within the CTE that is going to broaden our offering as well.
Speaker #3: Great. Thank you both. And then you recently announced a global availability of the Inspire laptop. Could you discuss how the international segment is contributing to the business?
Speaker #3: And separately, whether you're seeing any remaining tariff or supply chain challenges?
Speaker #4: So, let me take the first one about the international piece of it, and then Eric, I'll let you take the tariff piece. Internationally, I would say we've always had very strong demand.
Speaker #4: It's not an area where we, quite frankly, have really focused or invested. And obviously, given the disruptive year we've had so far in the U.S., we have given it a little bit more focus.
Speaker #4: And one of the recent press releases we talked about our partners, and in Italy, Bulgaria, and Poland. Part of the gems focus, and again, gems is headquartered in Dubai, and it's very much a premium-oriented private school system.
Speaker #4: It is for us to expand internationally. So, I think you're going to see more and more of that coming. We've got more, and we're building more and more of a pipeline in that area.
Speaker #4: On the tariffs, I'll hand that over to Eric to cover the second part. If we didn't cover it, Jared, your satisfaction, you can follow up with some of the questions.
Speaker #4: Go ahead, Eric. Yeah, I think the tariffs were most disruptive to the sales motion in Q1 and early Q2 when they were moving around so much and remained unsettled.
Speaker #4: Where we are now in Q3, and you'll see this in our filings, they have an impact of about 1 percentage point of gross margin.
Speaker #4: We've been treating the tariffs for the most part as a pass-through on a dollar basis. But that still creates a small amount of gross margin compression just because we're not marking up the tariff impact to us.
Speaker #4: You'd asked about impacts on supply chain as well. We haven't really noticed so much of a dislocation in terms of supply chain as a result of tariffs.
Speaker #4: The bigger uncertainty is in how education funding ultimately flows from federal-level funding vehicles down to individual schools, where a superintendent can make those decisions.
Speaker #4: And at that level, tariffs are less of a factor. Funding is more of a factor. On the P&L, tariffs do show up as a factor, but have a relatively modest impact on gross margins.
Speaker #4: Given the other tailwinds that we've picked up on a profitability basis. Is that helpful?
Speaker #6: Yes. Thank you. And then I think last quarter you'd spoken about shifting some of the manufacturing of core components from China to Thailand. Can you talk to whether that started to become a benefit or where we're at on that?
Speaker #6: And then also with the hinting of new hardware coming out, can you talk to anything new about where we should expect margins to trend from here with that?
Speaker #6: Thank
Speaker #6: you.
Speaker #4: Eric, how about I take that at first, and you can add?
Speaker #3: Yeah, I'll come back to that. I'll let you talk about.
Speaker #3: to it for margins. You
Speaker #6: You will see a press release coming out next week, Jared, and this is when we talk about hardware. It's not the laptop, but it's the interaction component.
Speaker #6: And it is somewhat in the public domain, but it hasn't formally been press released. And this is the new stylus. So you will read more about it next week.
Speaker #6: I've been actually showing it to a number of people and people are calling it game-changing. So we think it's going to be it's going to simplify everything with the way people use zSpace.
Speaker #6: And so I think it's super, super impactful. Eric can talk about the margin piece of it. Eric, you want to take that
Speaker #6: part? Yeah, and I'd be
Speaker #4: Delighted to. So, the key drivers of our margin expansion—we've talked about this before. One is the mix between software and hardware; you saw that very much in evidence this quarter.
Speaker #4: Every year going back, that's been responsible for 200 to 300 basis points of margin expansion. Structural factors within our software and our hardware revenues on the software side, as we bring more first-party content to market, you'll see that be a driver of software and software COGS as we break them out in our Q3.
Speaker #4: On the hardware side, the way to think about this is not an ongoing upward slope, but a sequence of step changes as new hardware is introduced at the laptop level with improved price performance characteristics.
Speaker #4: With the new tracking device and the new interaction device, you should expect, again, a small, modest, but measurable and structural improvement that will show up as a step-change improvement in hardware-related costs going forward.
Speaker #4: And the big appeal, as we see here, is firstly in the user experience. Paul alluded to that. It's exciting; it's a much better user experience.
Speaker #4: Secondly, in terms of logistics, there are fewer—there will be fewer peripherals to manage which if you're an IT director in a school district, that's going to be attractive.
Speaker #4: And obviously, that creates opportunities for us where less hardware in the ecosystem is less costly. As there are fewer boxes to ship as part of providing a solution—delivering a solution to a school—we expect to see shipping and handling improve as well.
Speaker #4: So again, modest changes, but structural, and you'll see a one-time step-up improvement that should be sustained in future reporting.
Speaker #4: periods. All right.
Speaker #6: Thank you both. This was very helpful. I'll pass it
Speaker #6: along. Thanks,
Speaker #1: Thank Jared. you. I'm showing there are no further questions at this time. I will now turn the call back over to Mr. Paul Kellenberger for any closing
Speaker #1: remarks. Thank
Speaker #3: So this concludes our earnings call. I just want to thank everybody for participating, and we're looking forward to the next one and getting through the fourth quarter here.
Speaker #3: And through 2025. Thanks to
Speaker #3: everyone. Disconnect for today's conference